Bankruptcies Surge 12%

The Administrative Office of the U.S. Courts reported that consumer bankruptcies rose sharply in the first nine months of 2010, another sign of individual financial stress due to the recession. A report from The American Bankruptcy Institute said “Consumer filings totaled 1,179,573 for the first nine months of 2010 representing nearly a 12 percent increase over 1,054,525 filed during the same period in 2009.”

The number is staggering because there are only 200 million adults and 120 million households in America. The ABI predicts that total consumer bankruptcies will hit 1.6 million this year.

The figures bode poorly for American businesses just as much as they do for the people  forced into bankruptcy and show why an economic recovery has been so slow to take hold. There are probably several businesses and banks that are victims of every personal bankruptcy .  People who tried to help the debtor may themselves wind up being late on their bills, a further problem for companies and another reason why business confidence is eroding.

Many bankruptcies are likely the result of home price declines, although the ABI study does not comment on that. Home equity loans and lines of credit were plentiful as the value of housing in most markets soared from 2000 to 2006.  Many people who got these loans are now having difficulty paying them off.  Moreover, the collapse of home prices wiped out most of these borrowing opportunities and left more than 11 million mortgages in America underwater. A large number of homeowners were left huge debts which suddenly included their mortgages.

The bankruptcy numbers underscore how intertwined the financial health of consumers, their profligate borrowing, the drop in home prices and their inability to pay debts is with the broader economy. Based on that formula, the bankruptcy numbers are not done marching higher.

Douglas A. McIntyre